With an aim to tackle the 40-year-high inflation rates across the US, the Federal government is set to pass some of its most drastic measures which will look to curb the ongoing price hikes.
After its latest rate-setting meeting ends Wednesday, the Feds will reportedly announce that the benchmark short-term interest rate will rise by a half-percentage point — the sharpest rate hike since 2000. The Feds will likely carry out another half-point rate hike at its next meeting in June and possibly at the next one after that, in July. Economists foresee still further rate hikes in the months to follow.
The administration is also expected to announce Wednesday that it will begin quickly shrinking its vast stockpile of Treasury and mortgage bonds beginning in June — a move that will have the effect of further tightening credit.
This being said, many economists think the Feds are already acting too late. Even as inflation has soared, the Fed’s benchmark rate is in a range of just 0.25% to 0.5%, a level low enough to stimulate growth. Adjusted for inflation, the Fed’s key rate — which influences many consumer and business loans — is deep in negative territory.
Brett Ryan, an economist at Deutsche Bank, said the balance-sheet reduction will be roughly equivalent to three quarter-point increases through next year. When added to the expected rate hikes, that would translate into about 4 percentage points of tightening through 2023. Such a dramatic step-up in borrowing costs would send the economy into recession by late next year, Deutsche Bank forecasts.